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November 6, 2020 | Joe Biden and Stock Market Returns

Hilliard MacBeth

Author of "When the Bubble Bursts: Surviving the Canadian Real Estate Crash"

A “clean sweep” on November 4 for Joe Biden and the Democrats looks increasingly possible. To get a “clean sweep” Biden would win and voters would give Democrats a majority in both the House of Representatives and the Senate.

What would happen to stock markets?

Jimmy Carter won a clean sweep in 1976, after the Nixon Watergate scandal, and kept control of Congress, both the House and the Senate, in 1978 midterms.

Bill Clinton swept all three branches in 1992 but lost the Senate and the House in the 1994 midterms.

George W. Bush captured all three prizes in 2000 and maintained that control in 2002 and 2004 but lost the House and Senate in the 2006 midterm election.

Barack Obama held the Presidency and the Congress from 2008 to 2010, and then lost the House to the Republicans in the midterms.

Donald Trump/Republicans held all three branches from 2016 to 2018 and then lost the House in the 2018 midterm elections.

When we look at the correlation between the US stock market and election results, we get better stock markets with a Democrat as President. In the special case when there is a Democrat in the White House and Congress is divided between Democrat and Republican control or held by Republicans, the stock market produces even better returns.

For example, Bill Clinton’s first and second terms were great for stock markets and during his last six years Congress was controlled by Republicans R (headings are Senate/House/President):

 

Source: Credit Suisse

 

The average market return under a Republican “clean sweep” is just 9.6 percent, much lower than returns when Democrats control all three branches.

The best average stock market return happened under a Democrat President and divided Congress at 34.1 percent compared to 13.4 percent when Democrats held all three branches.

So, if Biden/Democrats win a “clean sweep” the stock market is likely to perform well but not as well as during the Clinton years.

The Biden election platform includes about $2 trillion of spending over four years, with an emphasis on green-related projects. Biden has promised to reduce carbon emissions from transport, power and buildings. He has indicated that he will tax carbon production. Biden proposes higher taxes on businesses, by partially restoring corporate tax cuts under Trump, and hiking taxes on income over $400,000 for individuals. He also advocates for an increase in the minimum wage to $15 per hour. Even if Joe Biden wins and Democrats hold both branches of the Congress, there will be a need for compromise because the Senate majority would be held by a slim margin.

Credit Suisse estimates that a Biden “clean sweep” would reduce US earnings by 10 percent and would push inflation higher due to higher stimulus spending. Tax increases could be delayed. Their model predicts better economic growth under Democrats.

Credit Suisse forecasts a 3 percent drop in US equities under a Democrat “clean sweep” although markets tend to overreact after big changes.

The winner could be renewable energy as Biden is likely to extend incentives for wind, solar and hydrogen. Returns in the fossil fuels sector are likely to be weaker if Biden wins, as he has mused about banning fracking, and removing government incentives for the oil and gas industry.

But we saw in a recent Weekend Note that the S&P Global clean energy index was up a whopping 80 percent to October while the Canadian oil and gas index was down 40 percent. It is hard to envision clean energy gaining even further relative strength over oil and gas even with a Biden/Democrat victory.

 

Source: Bloomberg

Hilliard MacBeth

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances.. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson and GMP are registered trademarks of their respective owners used under license by Richardson GMP Limited.

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November 6th, 2020

Posted In: Hilliard's Weekend Notebook

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